ISDA Proposes Collaboration Between Derivatives and SFT Markets
ISDA is proposing ways to achieve greater collaboration between derivatives and securities financing transaction, or SFT, markets. The proposal has been set out in a recently published whitepaper, which highlights the significant efficiencies that could be achieved by closer coordination and alignment between the two markets, resulting in reduced costs for market participants. The proposal sets out that institutions operating in both derivatives and securities financing transaction markets could benefit from greater harmonization in documentation as well as from improvements in post-trade processing and automation.
ISDA has highlighted several areas where greater standardization and collaboration could be achieved, including:
- Developing common legal definitions across the derivatives and securities financing transaction markets, documenting derivatives and securities financing transactions under a common master agreement and procuring one set of legal opinions in jurisdictions around the world on close-out netting for both derivatives and securities financing transactions
- Implementing consistent solutions across the derivatives and securities financing transaction markets that enable market participants to more seamlessly adapt and migrate when key changes (such as the interbank offered rate transition) occur
- Developing common standards and taxonomies to facilitate automation and interoperability across derivatives and securities financing transaction markets and to enable a consistent trade record for confirmation and reporting on a broad scale
The paper highlights that ISDA has developed a Common Domain Model (CDM), which serves as a blueprint for how derivatives are traded and managed across the trade lifecycle. The CDM has the potential to cover other financial markets, including securities financing transactions. By providing a single data representation of trades across the derivatives and securities financing transaction markets, CDM could provide significant cost savings and address the market need for an efficient solution to this issue. With a single documentation platform and CDM for the repo, securities lending, and derivatives markets, there will be a single entry point for other service providers. This allows pre-trade service providers and post-trade providers (such as analytics, optimization, and compression platforms as well as regulatory reporting services) to integrate their systems with just one standard, increasing the scalability of the solutions they can provide.
The paper also sets out a proposal for how the ISDA Master Agreement could be expanded to cover securities financing transactions as well as derivatives. The paper proposes a set of securities financing transaction provisions to be added to the schedule of the ISDA Master Agreement, along with publication of a securities financing transaction definitional booklet. The paper also considers certain key issues that would need to be addressed in such an exercise and includes a granular analysis of key terms from the different documents to identify specific potential synergies as well as those key product terms where specificity would need to be maintained.
The EU Capital Requirements Directive and Regulation contain various provisions related to financial instruments, including derivatives. Securities financing transactions are not financial instruments as such, although where they relate to securities, those securities would be financial instruments. There are also provisions related to repurchase transactions, securities, or commodity lending or borrowing transactions and other capital-market-driven transactions other than derivatives. The change of documentation would not affect the characterization and treatment of securities financing transactions for the purposes of this legislation. Similarly, the change of documentation would not affect the characterization and treatment of securities financing transactions under the various US capital regimes (which differ based on the type of US regulated entity involved).
Keywords: International, Banking, Securities, Derivatives, Securities Financing Transactions, Common Domain Model, Interest Rate Benchmark, IBOR Transition, Reporting ISDA
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Previous ArticleBoE Announces Updates to TFSME to Support Lending for SMEs
ECB Finds Banks Unprepared for Pillar 3 Climate Risk Disclosures
The European Central Bank (ECB) published results of the 2022 supervisory assessment of climate-related and environmental risk disclosures among significant institutions (103) and a selected number of less significant institutions (28).
NCUA Assesses Credit Union Exposure to Climate-Related Physical Risks
The National Credit Union Administration (NCUA) released a Research Note that examines the exposure of credit unions to climate-related physical risks. In a related development
EBA Issues Multiple Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) is seeking comments, until July 31, 2023, on the draft Guidelines on the proposed common approach to the resubmission of historical data under the EBA reporting framework.
EC Adopts Regulation on Own Funds, Issues Other Updates
The European Commission adopted Delegated Regulations on own funds and eligible liabilities, on requirements for the internal methodology under the internal default risk model
CDP Platform to Report Plastic-Related Impact, Issues Other Updates
The Carbon Disclosure Project (CDP) announced that its global environmental disclosure platform has enabled reporting on plastic-related impact for nearly 7,000 companies worldwide
IASB to Enhance Reporting of Climate Risks, Proposes IFRS 9 Amendments
The International Accounting Standards Board (IASB) updated its work plan to enhance the reporting of climate-related risks in the financial statements,
BIS Addresses Data Gaps and Macro-Prudential Policy for Climate Risks
The Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published a brief paper that examines challenges associated with the use of macro-prudential policies to address climate-related financial risks.
FCA Sets Out Business Plan, Launches TechSprint on Greenwashing
The Financial Conduct Authority (FCA) published its business plan for 2023-24. The plan sets out details of the work planned for the next 12 months to achieve better outcomes for consumers and markets
UK Committee Sets Out Recommendations for Next Phase of Open Banking
The Joint Regulatory Oversight Committee (JROC), comprising the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) as co-chairs and the HM Treasury and the Competition and Markets Authority (CMA) as members
ECB Publishes Multiple Regulatory Updates for Banking Institutions
The European Central Bank (ECB) published the results of the 2022 climate risk stress test of the Eurosystem balance sheet,